EKIP– Expert Club for Economics and Politics A Different Opinion
More than a month of protests involving thousands of people do not seem to bother the ruling party – they not only have no intention of resigning, but also continue to pursue harmful policies. The latest manifestation of this was the update of the state budget. The article will analyze the arguments that justify this move.
The reasons for updating the budget fit into five pages, the content of which could easily have been written by a first-year macroeconomics student. It would be appropriate to justify taking on debt not only with a serious deficit, but also with the expected positive results from this debt. But in practice, such a justification is missing from the document. As economist Kaloyan Staykov from the Institute for Market Economics says: “The arguments in the official reasons for the bill to amend the budget law are either extremely unconvincing or represent outright lies.”
In the MoF's reasons we read: "... strict measures to limit spending should not be an end in themselves, since the experience of recent years has shown what negatives pro-cyclical fiscal policy brings to the economy. The contraction of collective consumption would have a negative impact on fragile growth and could push the economy back into recession." There is no need to comment on the insolvency of quantities such as "collective (aggregate) consumption"[1]. The Ministry of Finance does not argue its bare statement in any way. It seems that the cited "experience of recent years" exists only in the imaginary world in which socialists exist.
In complete contrast to their ideas about the economy, at the beginning of the month, the head of the IMF’s international mission to Bulgaria, Michelle Shannon, commented on fiscal stability as follows: “Bulgaria has maintained its hard-won macroeconomic and financial stability despite the unstable political situation.” The result? Surprisingly for the BSP comrades who want to increase their spending at all costs, according to Shannon, disciplined behavior has “… helped protect the country from the worst consequences of the global crisis.” So much for destructive fiscal stability.
The gap in the budget revenue forecast by the Socialists has shrunk significantly in less than a week. When the budget update was first discussed, the Prime Minister predicted a revenue shortfall of “between 1 and 2 billion.” In the Ministry of Finance document, the gap is now only 293 million leva. As economist Georgi Angelov notes: “With a budget of over 31 billion leva, this represents less than one percent and is not large enough to merit an update (such shortfalls/overfulfillments occur almost every year). The budget has enough capacity to cover such shortfalls (for example, from co-financing funds that will be saved due to the lower than planned absorption of EU funds, etc.).” But with such a large and rapid decline in the expected revenue shortfall, its realization at all can be questioned. It should be recalled that, unlike the ruling party, experts from the International Monetary Fund see no obstacles to budget execution. In other words, the revenue gap argument is extremely unstable.
The document states the noble intention of the government to revive the economy by paying off debts owed to business. “The planned resource of 160.4 million leva (0.2% of the estimated GDP) is intended mainly for the repayment of overdue debts of the state to business, accumulated mainly in the systems of the Ministry of Defense, the Ministry of Interior and the Ministry of Justice. Additional funds are also provided for investments in the budget of the Ministry of Health and funds for agricultural producers.” Here again, absolutely no justification is given as to how exactly paying off two ministries will revive the economy and lead to “improving the business environment”; i.e., there is another managerial bluff.
Not only that, but there is no justification at all as to why the debts of the Ministry of Interior and the Ministry of Defense will be financed through state debt. The authors of the document are trying to create the impression that if this loan is not withdrawn, the economy may again sink into recession. In light of this concern, it is more correct for them not to save and make reforms that will raise money in the future, but to cover old debts with a loan. Which is fundamentally wrong. After all, how do you build competitiveness and a business environment?
The Doing Business ranking assesses indicators such as the procedures required to start a business (burden of bureaucracy), issuing a building permit, registering property, protecting investor rights, the level of taxes, the bureaucratic procedures required to start international trade and the difficulties of closing a business. There is no mention here of paying debts to the police. Other similar rankings, such as the Heritage Foundation and The Wall Street Journal's Economic Freedom, the Fraser Institute's Economic Freedom and the World Economic Forum's Global Competitiveness Index, which measure the business environment and the competitiveness of the national economy, also do not mention paying debts through government loans. That is, this is a completely untenable argument in favor of taking on debt that all taxpayers will be forced to repay.
The last argument in support of the loan and the increase in the budget deficit is: "The lack of flexibility in spending does not provide an opportunity to implement some of the most urgent stabilization measures in the government's program. One of the main commitments of the government are policies aimed at growth and improving the business environment, including measures to pay debts to business, reduce the administrative burden, improve concession activities, restore good practices in the work of revenue agencies based on the principle of voluntary payment of tax and social security obligations, etc. The payment of overdue debts to business and strict compliance with the statutory deadlines for the payment of obligations under contracts by the state is a main commitment in the government's program. The state should be equal in its relations with business and be a fair partner. Non-payment of overdue debts is multiplied in the economy many times over by contractors and subcontractors and ultimately puts many fair companies in an extremely difficult situation, as the spiral of inter-company "Indebtedness is constantly increasing."
As I have already noted, the argument that taking out a loan to pay off the debts of the police and the army will improve the business environment is completely dropped (although the ministry has devoted most of the paragraph to this). Only the modest part at the beginning remains: “The lack of flexibility in spending does not provide an opportunity to implement some of the most urgent stabilization measures in the government’s program.” Lack of flexibility means that the cabinet does not want to change its policies. So far, it has been shown that the aforementioned “stabilization” ideas are nothing more than demagogy that will harm the budget rather than being able to stabilize the economy. Alas, this paragraph also reveals the predatory desire of the rulers to spend, regardless of whether there is a need for it and, as Kaloyan Staykov points out, what the consequences of their spending will be.
All the “arguments” of the Ministry of Finance are completely untenable. The hole in the revenue side of the budget may not exist at all, the business environment will not improve by paying off the debts of the power ministries, the political stubbornness to spend at any cost (described as “lack of flexibility”) can easily change, with the spending not being implemented, and fiscal stability and the refusal to borrow are not a prerequisite for a recession. Quite the contrary, as the IMF notes.
Another paragraph from the weak text of the Ministry of Finance is interesting: "In addition, the ministries and departments, in the course of implementing the state budget for 2013, are making insistent requests for additional funds of over 500 million leva (0.6% of the estimated GDP). However, not all requests could be satisfied while maintaining the fiscal position. In this regard, the primary spenders of budget credits must also take measures to prioritize and optimize the expenditures of their budgets."
At first reading, it seems like nonsense – if you won’t give it to them, why is this even mentioned? But in fact, with it, the authors of the explanatory memorandum want us to be grateful to them! Here is the alternative reading: “We will increase the deficit to the limit. But, rejecting the demands of the ministries, we preserve stability – thanks to us, the deficit is only 2%, and it could have been higher.” This paragraph is indicative of the arrogance of the rulers. They are not only increasing the deficit and taking out a loan, thus destroying hard-won fiscal and financial stability, but they also want us to be grateful to them!
So far, we have considered the visible. But what is not visible is no less scary than the increase in the budget deficit to the 2% limit and the borrowing. Namely, no reforms are envisaged. The only thing that vaguely comes close to the idea that any changes can be made is: “reducing the administrative burden, improving concession activities…”. That is, the money is not being withdrawn in order to achieve real long-term improvement of the environment (to invest in it), but to “eat it up”. We have already seen that the socialists have an affinity for increasing various subsidies and transfer payments. In the long term, these increases, made without regard to the budget’s ability to bear them, may cause a credit spiral – we will have to take out a new loan next year to service the benefits distributed by the government to certain groups of the population. Or we will have to increase taxes. This will be detrimental to both consumption (which the socialists so want to stimulate) and business.
Although the projected budget is feasible and there are no real indications to the contrary, the loan and the increase in the deficit are just a weak disguise for the desire of the rulers to spend more. Fiscal stability was achieved in the conditions of crisis. Moreover, the ruling GERB party also had a tendency to impulsively allocate funds. It seems that under the current triple coalition this success, as well as budgetary stability, will be sacrificed on the altar of populism and serving interests. Our neighbor Greece is a good illustration of exactly how destructive this policy is.
